Commentary by Greg Davis, chief investment officer at Vanguard in the United States.
Investors have long grappled with the concepts of risk and uncertainty. These concepts feed each other, and lately, with regard to Brexit, they've been ravenous.
After the U.K. Parliament voted on Thursday, March 14, to ask the European Union to allow Brexit to be delayed past March 29, a number of outcomes remain possible. Each is very different from the others except in its potential to concern investors.
"The latest vote just means the situation remains uncertain," said Greg Davis, Vanguard's chief investment officer. "Uncertainty has been a part of the Brexit process from the beginning, and such significant events underscore the value of a commitment to long-term, diversified investing."
A weakening in prices for U.K. and European assets in response to Brexit developments would almost certainly be felt within globally diversified portfolios.
An investor whose portfolio is fully diversified across asset classes and geographies could expect substantial direct exposure to these markets1 and even greater indirect exposure, considering the interconnectedness of global commerce. The U.K. is a global financial center and the world's fifth-largest economy. The E.U. comprises 28 states, including four of the world's seven largest developed economies.
Should investors reconsider global exposure?
"The goal of diversification is to spread risk within the portfolio," Mr. Davis said. "This limits the negative impacts of volatile markets while capitalizing on strong performance elsewhere."
"We knew that Brexit could spur volatility and be challenging for investors," he said. "What no one could know was the course that exit negotiations would take. There's always the potential for both positive and negative market developments."
Markets reflect such developments—the push and pull between known risks and uncertainty—through the prices they set for securities every business day. That makes it challenging for investors to try to profit by getting ahead of a trade.
Vanguard's investment professionals work together, as they have since the June 2016 U.K. referendum that set Brexit in motion, to ensure that our funds are positioned for any eventuality. Our Investment Strategy Group continues to assess the likelihood of different Brexit scenarios and works with our global portfolio management teams and Risk Management Group to consider the potential impact on investment outcomes.
"It's hard to get out of the way when an event as disruptive as Brexit comes along," Mr. Davis said. "Instead, what investors can do is understand why they're investing in the first place, stay invested through the inevitable ups and downs, spread their risk around by maintaining a diversified portfolio, and accept that none of us has a crystal ball."
1 More than 16% of the FTSE Global All Cap Index and more than 36% of the Bloomberg Barclays Global Aggregate Float Adjusted Composite Index consisted of securities from the U.K. and other E.U. member nations as of January 31, 2019.
The information contained herein does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. Broker-dealers, advisers and other intermediaries must determine whether their clients are eligible for investment in the products discussed herein.
All investing is subject to risk, including possible loss of principal.
Diversification does not ensure a profit or protect against a loss.